Cash Balance Pension Plans

Cash Balance just might be the most exciting plan design to ever come along. It has been around for a few years but was made feasible for a small business by the Pension Protection Act of 2006. The PPA legislation actually describes it as a "Hybrid" plan. Cash balance earns this description because it has both defined benefit and defined contribution features.

Defined Benefit Characteristics:

• Benefits must be definitely determinable and stated in the plan document
• Contributions are required annually at the stated level
• The plan sponsor assumes the investment risk (no participant direction)
• Defined Benefit 415 limits apply

Defined Contribution Characteristics:

• Participants have an account balance
• Contributions and interest are added to the account annually
• Contributions can be skewed by class to favor owners and key employees

There are a number of features related to cash balance plans that make them both easier and harder to understand. The contribution and the interest that will be credited to participants' accounts must be guaranteed by the plan. Unlike a 401(k) plan, participants do not get to direct investments in their accounts. Since the plan sponsor must guarantee the interest credit to the accounts, if the plan's investments earn less than the promised rate the employer must make up the difference. Conversely, if the plan earns greater than the promised rate the excess amount would reduce the employer's future required contributions. This is exactly the opposite of what we have become accustomed to with defined contribution plans, where the actual rate of return is exactly what is credited to the participants' accounts.

The exciting features of a cash balance plan include the fact that the defined benefit contribution limit can be used for the owner rather than the $46,000 defined contribution limit and the fact that contributions can be skewed in favor of the owner by creating classes of employees as we have become familiar with in new comparability plans. This allows us to create an "efficient" plan design by providing the maximum contribution for the owner while making lower contributions for the other employees. From a contribution standpoint, a cash balance plan can be looked at as a new comparability profit sharing plan without the $46,000 contribution limit for the owner class.

Another unique feature of a cash balance design is that a business is allowed to make the exact same contribution amount for all of the members of the "owner" class of employees. This means if we have different age owners they can still receive the same contribution amount. That is often not possible in most other plan designs, but is most often what the small business owner is looking for.

Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k. Or visit our website at www.ifc401k.com